Tax professionals give evidence to Lords on R&D, promoters and data collection

The Finance Bill Sub-Committee of the House of Lords Economic Affairs Committee undertakes an annual investigation into selected measures in the government’s draft tax legislation. This year the sub-committee’s inquiry is focusing on four areas within draft Finance Bill 2023-24:

• Reforms to Research and Development (R&D) tax credits which merge the two existing schemes as well as providing a higher rate of payable tax credit for loss-making R&D intensive SMEs
• Measures dealing with the promoters of tax avoidance
• Increasing the maximum prison term for tax fraud
• A requirement on certain taxpayers to provide additional data to HMRC

For a second year in a row the sub-committee is chaired by Lord Leigh of Hurley, a Conservative peer who is also a chartered tax adviser and a chartered accountant.

The sub-committee held its first evidence session for this inquiry on Monday 23 October. The witnesses at the session were:

• Ellen Milner, Director of Public Policy at the Chartered Institute of Taxation
• Emma Rawson, Technical Officer at the Association of Taxation Technicians
• Susan Cattell, Head of Tax Technical Policy at the Institute of Chartered Accountants of Scotland
• Richard Jones, Senior Technical Manager of Tax Policy at the Institute of Chartered Accountants in England and Wales
• Andrew Harding, Secretary-General at CIMA, and Chief Executive of Management Accounting at AICPA & CIMA

The session was divided into two separate panels but this report groups comments under the topics covered, to make the evidence easier to follow.

Written evidence has also been submitted to the inquiry, including by CIOT. You can read this here.

R&D schemes reform

Lord Rooker (Lab) said he was “bewildered” by the proposed start date of 1 April 2024 for the new R&D relief scheme in the bill, which will not get Royal Assent until “well into 2024”. CIOT’s Ellen Milner told him: “We are absolutely sympathetic with HMRC acting on error and fraud, but in some cases, businesses feel that there is not as much engagement with R&D taxpayers as you would expect in an inquiry. Having a timetable and extending it to work out clearly in what direction R&D should go in the future will allow those questions to be answered.”

ATT’s Emma Rawson said the consultation was “rushed” and moved “too fast” for feedback to be properly considered, adding: “We got draft legislation very shortly after the consultation closed, and there is a danger in that rush to get to April 2024 as a potential starting date.”

She continued: “In our view, for R&D relief to act as an incentive to investment and innovation, it needs to be something that you can factor in and plan for, not something that is nice to have that you end up with at the end of the year. That is our concern about the R&D intensive regime: that in many cases it might not be clear until after year-end, even, whether you have met that hurdle.”

CIMA’s Andrew Harding said that SMEs will need “very clear guidelines” on R&D changes, adding that “avoiding complexity will be key” and calling for the timescale for implementation to be at least a year.

Richard Jones of ICAEW went even further, saying that the consultation had been “rushed” and an implementation timescale of two or three years extra “would certainly not be unreasonable”.

ICAS’s Susan Cattell called for HMRC to be more transparent and hold conversations with businesses over the changes. She said: “It is a question of HMRC having the conversations, clarifying what it wants, getting the draft legislation out there and then having a consultation process, preferably in fairly good time, to give people enough time to make the necessary software changes prior to it coming in in 2025.”

Asked whether the R&D changes will represent a simplification, Cattell said the proposed legislation is different to that consulted on this year and “significantly diverges” from the existing large business scheme. She also questioned the addition of a separate scheme providing additional relief for R&D-intensive SMEs. She said: “We would definitely support a simplified merged scheme, but that is not what we have.”

Lord Leigh (Con) observed that the sub-committee had had ‘quite a few’ written submissions from people concerned with trying to regularise treatment of subcontracted R&D and subsidised expenditure in respect of SME claims. Milner said CIOT had discussed with HMRC the two options for the definition of an R&D subcontractor and think both systems have pros and cons. If this is not sorted out during the reform, removing the current ambiguity, it would be ‘a missed trick’, she suggested.

Tax avoidance promoters

Emma Rawson said that while the ATT fully supports efforts to stamp out the promotion of tax avoidance schemes, the approach should be more holistic. “It is almost like a whack-a-mole situation where we are making little changes to attack certain behaviours without looking at the wider picture. We need to look at the regulation more widely.”

She raised concerns over escalating the promotion of tax avoidance, a civil matter, to a criminal offence. She explained: “At the moment, the concern is that a bit too much of the power sits with HMRC. We think there needs to be more consultation on what could be done, and, importantly, more transparency around the process for issuing stop notices.”

Rawson suggested greater regulation of the profession, building on the work already done by the ATT and other professional bodies, without paying for an “expensive, costly and timely” external body. She said: “Let us build on the good work that we do. Our members are held to specific standards of ethics and conduct. The problem at the moment is that, anecdotally, some of the people peddling these schemes or providing poor advice are not members of professional bodies, so there is nothing we can do about that.”

Asked about the effectiveness of criminalisation, Ellen Milner said stop notices have only been issued to “small numbers” and that a more effective approach was greater awareness. She said: “This comes back to the publicity and awareness point. It really is a deterrent. We have also suggested to HMRC that it could do things like telling promoters, when it issues them with a stop notice, about the consequences of non-compliance.”

Richard Jones agreed that measures are “effective only if they are well known”, while the promoter industry “works only if people believe that they are going to avoid tax”. He said: “If HMRC and the profession can demonstrate that they do not succeed and do not achieve what the promoters say they will achieve, the whole industry will not survive. That is possibly one of the best routes to driving out this kind of behaviour.”

Susan Cattell added that the current measures have “driven out” a lot of promoters, leaving just a “very small hardcore”. However, she warned: “It is important to bear in mind that this small hardcore has evaded other attempts to stop it.”

Questioned by Lord Stevenson of Balmacara (Lab) on whether current deterrents targeted company directors but missed other people involved in avoidance, Milner said the CIOT’s Low Incomes Tax Reform Group has been exploring stooge directors and umbrella companies, as well as how to target the “controlling minds”. She said: “There could be some way to craft this so that it catches not the job title but broadly where the power is.”

Data collection

Emma Rawson said that HMRC “has not made a very strong business case” for data collection and that she is “not sure what the benefits will be”. She added: “The policy paper shows no macroeconomic or financial benefits. There is talk of greater data sharing with government departments, but it is hard to get a hang on exactly why much of this is being requested. There is some concern that some of it is data for data’s sake, because it would be nice to have, rather than having a specific use for it in mind.”

Baroness Valentine (crossbencher) questioned how onerous data collection about employee hours would be, while Lord Roborough (Con) asked whether the costs of doing so would be disproportionately high for smaller businesses that do not have formal systems in place.

Ellen Milner said HMRC’s estimate of the cost to businesses “felt very low” and also questioned the consequences for inaccurate data collected in error. She said: “Some already have this data at their fingertips, because it is part of what they need for their own payroll, but for others this will be an entirely new process.”

Rawson agreed that some of the areas where data will need to be collected will be difficult, such as actual hours worked by salaried employees, while there will also be running costs to businesses not factored in by HMRC.

She added: “I can see some benefits to the information on owner-managed businesses if HMRC is looking what money people are drawing from their companies, whether they are taking salaries, whether they are taking dividends and things like that.

“I cannot see much benefit for businesses, to be honest. I can see cost to businesses of doing a lot of this, and I am doubtful as to whether there will be additional benefit.”

Read the full transcript.

Please note the material in this blog was taken from a transcript of oral evidence which neither members of the sub-committee nor witnesses have had the opportunity to correct yet.